Buying a Home After Bankruptcy: What You Need to Know
Just because you’ve filed for bankruptcy doesn’t mean your chances of owning a house are forever in doubt. If you are otherwise able to become credit-worthy in the future, filing for chapter 7, 11, or 13 will not create a permanent roadblock for you in your home-buying ventures. However, there are some stipulations you need to know about.
Depending on which chapter of bankruptcy you filed under, 7 or 13 (which are the most consumer-centric forms of bankruptcy), determines when you’ll be eligible to purchase a home. However, there are provisions for people who have filed for chapter 11 that are worth noting if you haven’t yet declared bankruptcy. Chapter 11 allows individuals and businesses rearrange their finances and repay portions of their debt. Most plans for chapter 11 last three to five years, but it can be used to stop a foreclosure of your current home and catch up on late mortgage payments, rewrite the terms of a mortgage, and pay down tax liability without interest.
However, those who have filed for chapter 7 or 13 have already relinquished ownership of their home and are now looking for options for the future. Let’s begin with those who have filed for chapter 7.
Chapter 7
Individuals who filed chapter 7 liquidation bankruptcy will generally be eligible for a conventional loan four years after discharge, and eligible for FHA insured mortgages two years after the discharge, but only if the borrower has established good credit and has proven they can manage their financial affairs. FHA is not a bank; rather it’s a government agency that insures loans from lenders who are FHA approved.
You not only have to abide by the rules of the FHA, but those of the lending institution as well. For example, credit scores weigh heavily in whether or not you’ll be eligible for financing, and most FHA loans for consumers with credit scores of 640 and above are approved. However, if you’ve filed for chapter 7, it’s been four years since it was discharged, and you’ve got a 20 percent down payment, you may be approved with a credit score as low as 540.
Chapter 13
Under the Fannie Mae Selling Guide, you may become eligible for a conventional loan two years after a chapter 13 discharge (four years after a dismissal). An FHA-insured loan can be available even sooner: under HUD Handbook 4000.1, a borrower who is still in a Chapter 13 plan may qualify once at least 12 months of the plan’s payout period have elapsed, all required plan payments have been made on time, and the bankruptcy court has given written permission to enter into the mortgage transaction.
Prospective homebuyers in chapter 13 are repaying a portion of their debts on a monthly basis and do not have the freedom of following through with a financial transaction, such as getting financing for home loan. Filing chapter 13 means it will be on your credit score for seven years, and if you want to buy a home through financing, you’ll need written permission from the bankruptcy court before taking on the new mortgage. Keep in mind that if you do get consent and a lender gives you a loan, it will likely be at a much higher interest rate due to the risks involved.
Get Expert Advice
Szabo Law Group has a great deal of experience in bankruptcy cases. If buying a home is in your future plans, connect with us and we’ll go over your case and tell you what options are available to you.
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Frequently asked questions
How long after Chapter 7 bankruptcy can I get a mortgage?
Generally two years after the discharge for an FHA-insured mortgage and four years for a conventional loan, if you have re-established good credit and can show that you manage your financial affairs responsibly. The lender’s own rules – especially credit score requirements – also apply.
Can I buy a house while I am in Chapter 13?
Possibly. For an FHA-insured loan, HUD requires that at least 12 months of the plan’s payout period have elapsed, that all plan payments have been made on time, and that the bankruptcy court has given written permission to enter into the mortgage transaction. Even then, the lender’s own credit requirements apply, and the loan may come at a higher interest rate.
How long does a bankruptcy stay on my credit record?
A Chapter 13 filing stays on your credit record for seven years (in some cases up to 10); Chapter 7 and Chapter 11 filings can remain for up to 10 years.
Can Chapter 11 help me keep my current home?
Chapter 11 allows individuals and businesses to reorganize their finances and repay portions of their debt, usually over three to five years. It can be used to stop a foreclosure, catch up on late mortgage payments and rewrite the terms of a mortgage.
